Forex trading: hungry for change

Australia has a high level of forex traders by global standards.
Illustration: Dorothy Woodgate

by
Brendan Swift

Australian investors punch above their weight when it comes to forex trading, but the downturn in volatility has prompted many to sit on the sidelines.

IG Markets
chief market strategist
Chris Weston
says there is a lot of confusion in the market about the direction of the Australian dollar, with volatility remaining at its lowest point since 2007-08. Without that volatility, short-term trading opportunities tend to evaporate.

“All the consensus trades seem to be getting blown out of the water one by one," Weston says. “I think that’s confusing a lot of people right now. That’s partly the reason we’re seeing the number of traders dropping off as well – there’s no discernable trends which seem to actually last for any period of time."

CMC Markets
chief market strategist
Michael McCarthy
says CMC’s forex clients remain balanced in their expectations about the direction of the Aussie dollar: half are long and half are short.

While the long-term outlook for the Aussie remains negative, driven by a deterioration in the country’s international terms of trade, the recent fall to about US86¢ was overdone, McCarthy says. The Aussie is currently hovering between US92-94 ¢. “The deterioration [in the terms of trade] in the last 18 months was in the range of 12 to 15 per cent and the fall in the Aussie was more than 20 per cent, so a bit of a bounce is not unexpected . . . we might now be seeing a resumption of the down trend."

The number of Australian forex traders remains high by global standards, although the number placing at least one trade dropped 4 per cent to 51,000 last year, according to research house Investment Trends.

“That is in line with what we’re seeing globally – the British FX market dropped 3 per cent and the US FX market also dropped by 4 per cent,"
Investment Trends
analyst
Jimmy Kiely
says.

The number of Australian FX traders as a proportion of share traders is 9 per cent – only Britain is higher at 10 per cent. By contrast, the US has just 2 per cent, with only 115,000 active forex traders compared with 5.8 million active share investors. With an aggressive market of active traders in Australia, competition remains strong. Smaller specialists launching recently include Pepperstone, which opened in 2010 and may be heading for an IPO.

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However, IG Markets remains the largest FX provider, with an 18 per cent market share, followed by AxiTrader (12 per cent), FXCM (11 per cent), GO Markets (9 per cent) and CMC Markets (8 per cent), Investment Trends says.

Mobile trading

In March, CMC recorded more than 1 million customer trades on mobile devices. “Australian customers trade all throughout the 24-hour cycle," it says.

About one-third of IG Markets’ customers are trading through mobile platforms. IG Markets was rated the best service provider for smartphone, tablet and app features, according to the Investment Trends survey.

“It shows people are very interested in how their P&Ls are doing at any one time. We’ve seen a massive increase over the last couple of years in people placing trades over their iPhone and Android, rather than going onto the internet," Weston says.

CMC Markets, which overhauled its platform in 2011 and has since rolled out several major real-time upgrades, was rated the best service provider for platform features. The MetaTrader platform is also offered by several FX traders and continues to grow in popularity, according to Investment Trends.

The number of FX traders using it as their main platform has increased by 17 per cent over the past 12 months to 48 per cent. A further 23 per cent of current FX traders plan to start using MetaTrader in the next 12 months.

IG Markets’ Weston says its ability to use external software that allows automated trading – known as expert advisers – is one of the main reasons for its growing popularity, although he also cautions about their use.

“I think EAs are fantastic personally but I wouldn’t be going out and buying one off the shelf from someone necessarily who is promising you the world and a 5000 per cent return."

Market conditions remain difficult – even professional FX futures traders have posted poor recent results, as measured by the Barclays Currency Traders Index. “The first three months of this year they’ve lost money," Weston says. “The professional guys are losing money. It’s very difficult, but we do have a lot of clients who are making money at the moment."

Significant risk

Currency trading is often considered a zero-sum game: for every winner there is a loser. An assessment of the Barclays Currency Traders Index from 1990-2010 by the CFA Institute found managers were not able to generate alpha returns (although outperformance was 22 basis points per month if not accounting for four risk factors: carry, trend, value and volatility).

“Our empirical results suggest that, as with other asset classes, the currency market offers beta-like returns and some managers are able to generate significant alpha returns over and above the returns explained by style factors," the CFA Institute report said.

Many investors will steer completely clear of the area.
Justin O’Kane
, a currency options trader at NAB and ANZ before becoming a financial planner, says retail investors shouldn’t use FX or options. “It’s pure punting – I see no ­difference between people trading FX and any other form of speculation – gambling."

With the significant risks involved, retail forex traders need a clear strategy. Weston says an understanding of technical analysis, as well as a strategy to cut losses is crucial.

“You have to have an understanding of technical analysis if you’re trading currencies because you don’t [for example] hear about the Japanese coming out and buying a huge amount of Australian government bonds until a week or two later," he says.

“Technical analysis rationalises human behaviour and tells you where supply and demand has been, and where it is likely to be again."

Another way to trade the major currencies without the risk of leverage is through exchange-traded funds (ETFs). BetaShares offers all three of the currency ETFs trading on the ASX and its US dollar ETF is one of the more popular products (it also offers similar ETFs that track the Australian dollar against the euro and British pound).

While it is an asset class that does not tend to appreciate over time, it has a low correlation with sharemarket movements and can provide an effective hedge. BetaShares managing director Alex Vynokur says some retail investors have recently sold shares or US index products, which have run strongly, but bought currency exposure. “A lot of investors are quite keen to preserve their exposure to currency but just want to dial down the rise in the equities portion of their portfolio."

Research house Zenith Investment Partners says the product may best suit investors with less than $100,000, after which point forex brokers potentially offer cheaper one-off spread costs compared with BetaShares’ 0.45 per cent management fee.